The US dollar bounced back after yesterday's brief dip, as risk appetite soured today on concerns over ailing banks and a global recession. Meanwhile, U.S. consumer prices rose 0.3 percent in January for the first time since July due to higher energy costs. However, sluggish economic growth will likely keep inflation pressures tame in the near term.
The euro plunged after company earnings were worse than expected. European Central Bank President Jean-Claude Trichet said the financial crisis creates a serious challenge and that the ECB will provide financial institutions with unlimited cash to help them through the crisis. Euro losses were somewhat limited on hopes that euro zone's problems will be resolved.
The yen remains attractive in times of economic instability. However, its currency seems to be losing favor recently on concerns over the health of Japan's economy. Bank of Japan said economic conditions were falling rapidly. Japan's economy shrank an annualized 12.7 percent in the fourth quarter of 2008, more than three times than the U.S. economy in the same period.
The British pound rebounded as UK data showed a surprise 0.7 percent jump in retail sales during January. Despite a brief rally, investors remain skeptical about UK growth, since unemployment and other economic data suggest the economy remains very weak. UK home repossessions jumped to a 12-year high. UK policymakers are very concerned that the UK may suffer a similar depression like Japan in the 1990s. Thus, UK will use quantitative easing to revive the economy.
The Canadian dollar weakened after news that Canadian consumer prices surprisingly fell 0.3 percent in January, opening the door for another 50 basis point cut to 0.50 percent on March 3. Meanwhile, falling equities will continue to batter the loonie as weak earnings suggests a deepening recession, luring investors into safe haven currencies.
The Australian and the New Zealand dollar also skidded on worries over bank's exposure to sluggish eastern European economies, especially Austrian and Swedish lenders. Aussie losses were limited after Australia's central bank governor Glenn Stevens said its economy is expected to rebound later this year as 45-year low interest rates are expected to give a powerful stimulus to the economy. Stevens comments reduced expectations of a rate cut in Australia on March 3.
10-Year Treasury Note Yield: 2.7824%
Dow Jones Industrial Average: 7,391.60 -75.45